Investors approaching IRAs with caution

Investors approaching IRAs with caution
Chicago Tribune - ‎May 24, 2009‎


Investors approaching IRAs with caution
By Andrew Leckey
May 24, 2009
It is the year of living cautiously for investors with individual retirement accounts.The economic problems that felled investments and job security have turned many formerly eager IRA investors into tentative souls."We've seen a slight increase of a few hundred dollars per account in the IRA contributions made in 2009 compared to last year, which is the good news," said Ken Hevert, vice president of retirement savings products for Fidelity Investments. "However, we've also seen an overall decrease in the number of people actually making those IRA contributions."Although some investors see discounted investment prices as an opportunity as they sock away IRA money, many others are unsure.Investing in an IRA is discretionary, and this is a time of significant financial challenge, Hevert said. The one thing that didn't change was that many investors found motivation in the April 15 tax-filing and contribution deadlines and chose that as the time to invest, he said.Employment trends are pushing money into IRAs."Because the financial crisis has significantly increased the number of layoffs throughout industries, we're seeing a lot of people doing rollover IRAs from their company 401(k) accounts," said Petra Campos, director of retirement products for Charles Schwab. "They can leave that money with their former employer, but a great many have been choosing to roll it over to IRAs."Diversification of asset classes and investments based on how many years you have left until retirement always has made sense for IRAs, but the past year dramatized this, Campos said. As a result, investors want to put their money where they have the most flexibility on how to invest it."With so much change in the workforce, 401(k) investors leaving their companies are faced with the choice of leaving their money where it is, rolling it over to a new employer, rolling it over into an IRA or cashing it in and spending it," said Jack VanDerhei, research director for the Employee Benefit Research Institute. "That last choice, cashing it in, is the worst possible because you'll be taxed on the money as regular income and pay a 10 percent penalty on the distribution if you're not 59 1/2."Besides age, other ways to avoid the 10 percent withdrawal penalty are if you use the money as a first-time home buyer, for higher education for your immediate family, for unreimbursed medical expenses over 7.5 percent of adjusted gross income or for health insurance if you've been unemployed for a certain period. You'll still have to pay the taxes.In the case of a new employer's 401(k), check to see if it offers investment options that suit you, VanDerhei said. That shouldn't be a problem if you roll it over to an IRA at most brokerage and mutual fund companies, but compare the overall performance of several firms."There's a big disconnect about IRAs in 2009, with a lot of investors stopping their contributions because they're worried about losing more money in the stock market," said IRA expert Ed Slott, whose Web site is at irahelp.com.What many fail to realize is that they don't have to put the money in stocks but can instead choose certificates of deposits or bonds or money-market accounts, he said. There is no one IRA strategy right for all investors, because each individual's situation is different."I like to use an analogy of the IRA as a wine glass: You can put in either water or straight vodka," Slott said. "It all depends on how aggressive you really want to be."Slott, a presenter at many consumer investment seminars, has noticed some gradual erosion in the negative attitude toward stocks and mutual funds. "I hear a lot of people talk about going back into the stock market now because they figure it is down so low they can't lose much," Slott said. "But they're approaching it much like going into a cold swimming pool, dipping their toes because no one really wants to dive in."Hevert, Campos and Slott recommend Roth IRAs. These don't give a tax deduction for investment like a traditional IRA, but they do grow tax-free and don't require that you take minimum distributions at age 70 1/2, as traditional IRAs do.When converting to a Roth from a traditional IRA, you'll pay tax on the entire amount being converted. But many investment values are down significantly, which means paying less tax on gains. The potential of tax rates being higher in future years provides further reason to convert, some experts say.In 2010, investors of any income level (rather than the current $100,000 or less in modified adjusted gross income required for Roth eligibility) will be able to make the conversion to a Roth IRA and also spread the tax hit over 2011 and 2012."There's no question that if you're putting money into an IRA, you should do it in a Roth," Slott said. "Some experts argue there's an advantage to a traditional IRA because it helps with your current tax refund, but I don't know anybody who invests a tax refund."

Time's the best answer for restoring nest egg

Time's the best answer for restoring nest egg
Cherry Hill Courier Post - ‎May 8, 2009‎

Time's the best answer for restoring nest egg

"Visit courierpostonline.com/recession for all the tips on how to deal with the 'great recession.' "

By ANDREW EDER
Gannett

The 2008 stock market plunge has inspired jokes, bumper stickers and offhand quips to the following effect: My 401(k) is now a 201(k).

Behind the gallows humor is an uncomfortable truth: The bear market, as of March, wiped out an estimated $2 trillion in value from 401(k)s and individual retirement accounts.

The losses have reset retirement expectations for many older workers and exposed the dangers of a retirement-savings system that has shifted responsibility and risk onto the workers themselves.

In 1980, 60 percent of private-sector workers were covered by a defined-benefit pension plan, while 17 percent were offered a 401(k) -- then a new investment vehicle that allowed workers to stash away income tax-free, often supplemented by matching funds from the employer.

By 2006, those numbers were reversed: Now only 10 percent of workers have a defined-benefit plan, while 65 percent are offered a 401(k). The number of workers who were offered both types of plans stayed flat.

The rising share of workers with 401(k)s means that individuals need to make decisions about how to invest a big chunk of their retirement savings. Advocates say that's not always a good thing.

"People are not ready to take care of themselves, quite honestly," said Jean Setzfand, director of financial security for AARP, the 40 million-member advocacy group for Americans age 50 and older.

For those close to or already in retirement who have seen their accounts decimated, there may be no option but to work longer or rejoin the work force. But everyone who manages a retirement account can benefit by following a few pieces of advice.

Keep contributing: The temptations to cut 401(k) contributions can be myriad. Workers are weary from market losses. Financial pressures on families are mounting, making the extra income a tantalizing target. Some companies have stopped providing matching funds.

But those who cut off the flow of funds to their retirement accounts miss the opportunity to buy into the market at a discount.

"The biggest mistake is not continuing to contribute," said Carol Arnott, a certified financial planner with Greenville Financial Group. "When the market is in such a decline, it's a great place for us to be buying in with our long-term money."

Don't jump around: Another temptation is to move 401(k) money away from battered stock funds to safer investments like money market funds. Doing so locks in losses from the bear market and ruins the chance of benefiting from the rebound.

It's simply impossible to time the market, Arnott said. Another mistake she sees is investors who jump in and out of investment funds based on their performance in the previous year.

"It's like barreling down I-95 and looking in the rearview mirror," Arnott said. "You are destined to crash."

And for those who want to cash out a 401(k) when leaving a job, beware -- it will cost you 20 percent of the account's value in federal taxes, and 10 percent in early withdrawal penalties.

Watch asset allocation: It's not smart to hop from fund to fund -- but inertia can also be dangerous. Workers need to rebalance their retirement accounts as they age to adjust risk levels and find the proper mix of equity and fixed-income investments.

"When you leave people to their own devices, a large percentage of people close to retirement ended up betting way too heavily on equities," said Jack VanDerhei, research director at the Employee Benefits Research Institute.

One answer to the problem of asset allocation is target-date, or lifecycle funds, where fund managers choose an investment mix based on an individual's expected retirement date, although the management of these funds has recently come under increased scrutiny.

Reconsider expectations: Younger workers have the benefit of having many more years to return their retirement accounts to health. For those closer to retirement, big 401(k) losses may require fundamental adjustments in their plans.

One strategy is to extend the time frame in which workers plan to tap their 401(k)s. For some, that may mean postponing retirement, or even finding a job in retirement to keep some income flowing.

"Stay in the work force as long as you can," advised AARP's Setzfand. "Only time can help resolve this matter."

Survey: Calculating a comfortable retirement
Philadelphia Inquirer 

Survey: Calculating a comfortable retirement By David Pitt ASSOCIATED PRESS DES MOINES, Iowa - Rising costs and uncertainty about the economy have workers less confident in their ability to save enough money to retire comfortably, say the authors of a new study released last month. Even though workers are saving more and expecting to work longer to improve their chances of a happy retirement, there's still a disconnect. The survey shows that many are failing to plan appropriately and making incorrect assumptions about retirement income. The new survey by the nonpartisan Employee Benefit Research Institute finds that only 13 percent of U.S. workers say they're very confident they'll have enough money to retire comfortably. "Concerns about the poor economy coupled with the losses that have recently been experienced in the stock market have resulted in the lowest percentage [of a confident outlook] since the start of the survey 19 years ago," said Jack VanDerhei, one of the survey's authors and the EBRI research director. "But the good news is, I really do think this will be a wake up call for many people who had false optimism in the past." And 41 percent more workers said they're somewhat confident of having enough savings for retirement, down two percentage points from the year before. Only 20 percent of people already retired say they're very confident they'll be financially secure. That's just half of the 40 percent from the survey a year earlier. It's no surprise that most survey respondents said the economy was largely behind their pessimism. Change in behavior. With the dour mood about retirement prospects comes some behavioral changes that advisers and retirement planners say may be one of the positives coming out of the economic downturn. The survey shows that 81 percent of those who have lost confidence in having enough money to retire say they are spending less. The survey also shows 65 percent of workers say they are currently saving money for retirement. "One strategy would have been to roll up into a ball and somehow put your head in the sand and ignore this is happening," said Dan Houston, president of retirement and investor services at Principal Financial Group Inc., an underwriter of the survey. Workers have not done that, however. He said people are beginning to understand a secure retirement means saving much more than they have been. The average worker with an employer-sponsored retirement plan puts aside 7 percent, which is about half of what today's worker would need to live a comparable lifestyle in retirement, Houston said. Estimating how much money it will take to live a good retirement is one of the largest miscalculations among workers, VanDerhei said. About half the workers in the survey say their household savings and investments total less than $25,000, excluding the value of their home. A surprising 20 percent say they have less than $1,000 in savings. This signals a tremendous problem ahead. Consider that a woman earning $40,000 at retirement would need to have $203,134 in savings by age 65 to ensure she could replace 80 percent of her income in retirement, VanDerhei said. The calculation assumes she has purchased an annuity with a nominal guaranteed income and receives Social Security. A man under the same circumstances would need $190,138. Sources of retirement income. Another point of confusion for many workers is the source of their retirement income. Among workers without a defined benefit retirement plan at work, 41 percent believe they have such a pension plan. A defined benefit plan is one in which an employer pays into but the worker does not. "I'm just afraid you still have a situation where these are people who don't understand the difference between defined benefit and defined contribution plans," VanDerhei said. "They think they'll magically end up with what mom and dad had." The U.S. Bureau of Labor Statistics said in a March report that just 20 percent of private industry workers have a defined benefit plan. About 43 percent have a defined contribution plan such as a 401(k). A disturbing factor for many investment advisers and retirement planners from the EBRI survey is that only 44 percent of workers say they have tried to calculate how much money they'll need to have saved for retirement. Another 44 percent said they simply guess at how much they'll need. Fewer than a quarter say they've tried to approximate how much they'll need and fewer than a fifth say they've checked with a financial adviser. Nine percent say they read or heard about how much they should have, 7 percent have used an Internet calculator and 5 percent filled out a worksheet. The survey is based on random telephone calls to 1,257 people age 25 and older in January. It included a cell phone supplement to encompass a broader selection of people. The survey's statistical margin of error is plus or minus 3 percentage points. The was sponsored by EBRI and Washington-based market research company Mathew Greenwald & Associates Inc.

Humberto Cruz: Shape up your finances and retirement savings

Humberto Cruz: Shape up your finances and retirement savings
Sun-Sentinel.com

Humberto Cruz: Shape up your finances and retirement savings

May 4, 2009

 Exercising can be a pain when we're way out of shape (I know because I was 44 pounds overweight once). But that's exactly when we need to do it, starting slowly if we must, as part of an overall, well-thought-out plan to improve our health and fitness.

The same is true about our finances, as today's tough economic times are demanding — but not always receiving — a greater commitment to sound financial planning, even if we start with baby steps.

I thought about this after reading the 2009 Retirement Confidence Survey, the 19th in a series of annual studies about Americans' readiness and attitudes about retirement. The survey has been co-sponsored each year by the Employee Benefit Research Institute and research firm Mathew Greenwald and Associates.

This year's main findings are sobering: Just 13 percent of American workers, down from 18 percent last year and 27 percent in 2007, are "very" confident of having enough money for a comfortable retirement. That 13 percent is the lowest on record. Among retirees, confidence also fell to a new low, with only 20 percent saying they are very confident, down from 29 percent in 2008 and 41 percent in 2007.

"Our survey first picked up the drop in retirement confidence last year," said Jack VanDerhei, research director at the non-profit, non-partisan Employee Benefit Research Institute. "Given the uncertainties that exist about the economy, it is no surprise the downward trend has continued." Besides this drop in confidence, a less-noticed section of this year's study reveals an understandable but disquieting change in attitudes about financial planning.

For example, 21 percent of U.S. workers now say preparing for retirement "takes too much time and effort," up from 11 percent in 1998, when the stock market was going gangbusters. Just 48 percent say they enjoy financial planning now, compared with 62 percent in 2000, about the time the tech bubble began to burst.

Now, 63 percent believe that "anyone can have a comfortable retirement if they just plan and save," compared with 71 percent in 2002. I consider the drop significant, considering the 2000-02 period was a terrible time for the stock market.

As for good news, at least more Americans are recognizing reality. A recurring theme I found in many previous surveys, particularly during the late 1990s, was one of false confidence.

Besides cutting expenses, many workers expect to work longer, with 21 percent saying they'll be on the job until their 70s, and 72 percent planning to work for pay at least part time after retirement.

But one thing most American workers don't do — and it could help them tremendously — is at least estimate how much money they will need in retirement. In this year's survey, only 44 percent of workers said they or their spouse have tried to make the calculation, down from 47 percent last year. For help with the calculation and other savings tips, see choosetosave.org.

 

More Americans understand reality of what it takes to retire

More Americans understand reality of what it takes to retire
Chicago Tribune

401(k) plans under scrutiny after Americans lose $600 billion in ... Chicago Tribune

401(k) plans under scrutiny after Americans lose $600 billion in ...

Chicago Tribune

 Gail MarksJarvis

It seems 401(k) plans are being hauled out by Congress for a public stoning.

It's the catharsis many Americans need after losing an estimated $600 billion in 401(k) plans in the worst bear market since the Depression.

The huge drop in the stock market has focused congressional attention on practices within some 401(k) plans—practices that can cause people to pay excessive fees and that subject workers to investment choices that are not always in their best interest.

The market downturn has highlighted the fact that many Americans are not educated adequately about investment decisions and fumble mutual fund choices.

For example, as the market was beginning its decline in 2007, 1 in 4 Americans ages 55 to 65 had 90 percent or more of their 401(k) money invested in stock mutual funds, according to research by Jack VanDerhei, research director at the Employee Benefit Research Institute.

That's dangerous for people near retirement—and probably cut their savings almost in half. Financial advisers suggest a more conservative approach for preretirees: about 50 to 60 percent of 401(k)'s in stocks.

Meanwhile, target-date mutual funds failed investors badly too. Such funds employ professionals to choose investments. Yet the target-date funds designed for people planning to retire next year had about 57 percent of their money, on average, in stocks.

That left near-retirees with losses averaging 26 percent at a time when they will have trouble rebuilding savings.

Brian Graff, executive director of the American Society of Pension Professionals and Actuaries, said that lawmakers and senior Securities and Exchange Commission staff were "stunned" by the heavy stock exposure target-date funds gave people on the verge of retirement.

But Congress played a major role in moving investors into such funds. Worried that Americans were investing too conservatively, Congress gave employers the go-ahead to move employee 401(k) money into target-date funds a couple of years ago, unless employees wanted a different mix.

"We need a makeover" for the 401(k) system, Graff told a Midwest conference of employers and 401(k) advisers Monday. "What has happened has given us a black mark."

Americans are so discouraged, he said, that a survey showed 58 percent think of their 401(k) plans as "gambling." Only 13 percent of those near retirement are confident they will be financially secure in retirement—the lowest level in the 19 years the Employee Benefit Research Institute has surveyed confidence.

With angst growing, some lawmakers have resurrected 401(k) proposals that have been discussed, but failed to advance, in recent years. Among the measures championed by Rep. George Miller (D-Calif.), chairman of the House and Labor Committee: a requirement that employers report clearly to 401(k) participants what they are spending on fees. The fees are usually hidden and can be so excessive in relatively small 401(k) plans that they eat up a large portion of employees' savings.

In addition, the Senate Special Committee on Aging has been conducting hearings on target-date funds. It's too early to say what may happen, but observers think lawmakers could require changes in what goes into those funds and whether they're appropriate for automatic enrollment. Others fear more a more dramatic overhaul of the 401(k) system.

Target-date funds have been criticized because fund companies sometimes dump some of their worst-performing funds into them, a way to prop up sales in the funds.

Also, critics say target-date funds have an incentive to overexpose participants to stocks because fund companies make more money in stock than bond funds.

"There's a conflict of interest," Graff said. "They are incentivized to put their dogs into the funds or to put more equities in to produce more revenue for the fund companies."

Average Asset Allocation of 401(k) Accounts, by Participant Age

Retirement Confidence at Record Low, Survey Says

Washington Post

Retirement Outlook Drops to Record Low Anne Tergesen. Wall Street Journal (Eastern edition). New York, N.Y.: Apr 14, 2009. p. D.2

Chicago Sun-Times: Americans have little retirement confidence survey finds

Americans have little retirement confidence survey finds

Americans Lose Confidence in Ability to Retire U.S. News & World Report

Americans Lose Confidence in Ability to Retire

U.S. News & World Report

Americans Lose Confidence in Ability to Retire

April 14, 2009 09:59 AM ET | Emily Brandon | Permanent Link |

Optimism about a retirement filled with golf and gardening is being replaced by a vision of retirement that includes work for pay and a considerable amount of cutting back. Only 13 percent of Americans say they are very confident they will have enough money to live comfortably in retirement, according to a new survey. That’s a record low since the Employee Benefit Research Institute began asking the question in 1993 and continues a downward trend from 27 percent in 2007 and 18 percent in 2008. Retiree confidence in having a financially secure future has also dropped to a new low, with only 20 percent now saying they are very confident, down from 41 percent in 2007 and 29 percent in 2008.

Economic uncertainty, inflation, and the cost of living are the primary factors contributing to this decrease in retirement confidence, according to the EBRI telephone survey of 1,257 Americans age 25 and older conducted in January 2009. In addition, negative experiences such as a layoff, pay cut, loss of retirement savings, or an increase in debt almost always negatively impact the retirement security of those who experience them. But most Americans were not on track for a secure retirement even before the recession began. “There was so much unwarranted optimism going into this that people have a much more realistic outlook now,” says Jack VanDerhei, research director for EBRI. “You may never have been on target even before you had the kind of losses many people incurred last year in the stock market.”

More work. Because of the economic downturn, many employees say they expect to delay retirement or work after they have officially retired. Some 28 percent of workers say the age at which they expect to retire has changed in the past year, typically because they have postponed retirement with the intention of increasing their financial security. The median worker expects to retire at age 65, with 21 percent planning to continue on into their 70s. The typical current retiree actually retired at age 62. And 47 percent of retirees say they retired sooner than they originally planned to. “If you are already 55 or older and $50,000 is all you have saved for retirement, I think the only option you have at that point is to try to push back your retirement age,” says VanDerhei. “Never retire until you are sure you have enough money because it is going to be very difficult to enter the workforce later on.” But most workers seem to think they will be able to find work during the traditional retirement years. About 72 percent of Americans expect to work after they officially retire, up from 63 percent in 2008. Only 34 percent of current retirees report they actually worked for pay at some time during their retirement.

Becoming realistic. Most workers (81 percent) who have lost confidence in their ability to retire are cutting expenses. Some are also changing the way they invest their money (43 percent), working more hours or a second job (38 percent), saving more money (25 percent), and seeking advice from a financial professional (25 percent). Yet, only 44 percent of workers report they have tried to calculate how much money they will need to save to live comfortably in retirement. An equal proportion (44 percent of workers) simply guessed how much they will need to accumulate. “For the average worker who makes $40,000 a year over the course of working, you’ve got to save between 13 and 15 percent of your pay,” says Dan Houston, president of retirement and investor services at Principal Financial Group Inc., an underwriter of the survey. “The average deferral is about 7 percent. We’re saving about half as much as we should be.”

But, should you figure out the exact amount you need to save, be prepared for the cold shock of realism. Among workers who did a retirement savings needs calculation, the percentage reporting they are very confident about their ability to retire decreased from 29 percent in 2008 to 19 percent in 2009. For employees not doing the calculation, the percentage very confident remained steady at 9 percent in 2009, compared to 8 percent in 2008.

Retirement Outlook Drops to Record Low (The Wall Street Journal)

Retirement Outlook Drops to Record Low (The Wall Street Journal)

By ANNE TERGESEN

A long-running survey about Americans' plans for their later years shows that workers' and retirees' confidence about their retirement security has deteriorated sharply during the past two years, to record lows.

In a sign of just how bleak the retirement landscape has become, the survey of 1,257 Americans found that the percentage of workers who say they are very confident about having enough money to retire comfortably has dropped to 13% this year. That's down from 18% in 2008 and from an all-time high of 27% in 2007. And it marks a record low for the 19-year survey, which the Washington, D.C., nonpartisan and nonprofit Employee Benefit Research Institute conducts with Washington public opinion and market research company Mathew Greenwald & Associates Inc.

Amid plummeting retirement-account balances and a poor economy, the results aren't surprising, says Jack VanDerhei, a survey co-author and research director at EBRI, which conducted this year's poll in January.

Retirees, Mr. VanDerhei says, are slowly waking up to what amounts to "a huge gap between what people think it's going to take to retire comfortably and what it actually takes." With 49% of people 55 and older having saved less than $50,000, many people will be forced to settle for a "much lower standard of living in retirement than what they had hoped for," he says.

More troubling, the survey found that 25% of today's workers are highly optimistic about covering such basic expenses as food and housing costs in retirement, down from 34% in 2008. Just 13% say they are very likely to have enough to defray medical expenses, down from 18% in 2008. Those figures are down from 40% and 20%, respectively, in 2007.

The deterioration in confidence was especially pronounced among workers ages 44 to 54, whose retirement-account balances will have less time than those of younger workers to recover from the recent stock-market meltdown. Confidence also was especially shaken among households with annual incomes of $75,000 or more, in large part because they had more money at risk in the stock market, Mr. VanDerhei says.

The survey paints a gloomy picture of the outlook for today's retirees. Among current retirees, only 20% -- versus 41% in 2007 -- are very confident of being able to afford a financially secure retirement. Just 25% say they expect to have enough to pay for medical expenses, down from 41% in 2007. And only 34% are optimistic about covering their basic expenses, compared with 48% two years ago.

The survey contained a few glimmers of hope. It notes that workers are taking steps to shore up their retirement savings. Among those who have lost confidence in their ability to retire comfortably, 81% say they have cut spending, 38% say they are working more hours or have secured a second job, 25% say they have sought advice from a financial professional, and 25% report saving more.

Just as important, few report cutting back on contributions to workplace retirement-savings plans. Among those participating, some 72% say they haven't changed the percentage of their salary they are funneling into these plans. Sixteen percent say they have increased their contribution rates, with just 11% cutting back.

Nonetheless, survey sponsors say, some of the steps workers are taking to bail themselves out may prove unrealistic. For example, some 25% of workers say they plan to postpone retirement. (The age at which workers say they plan to retire has crept up from a median of 62 in 1991 to 65 since 2004.) However, the survey notes that almost half of current retirees say they left the work force sooner than expected, frequently due to health problems, downsizings or obsolete skills. Moreover, while the survey has consistently found that about two-thirds of workers plan to work after retiring, fewer than 35% of current retirees say they have actually held down jobs at some point during retirement.

Economy dampens hope of a comfortable retirement, Seattle Post-Intelligencer: Business

Economy dampens hope of a comfortable retirement

Plan Sponsor (4/7/09) – “Is the 401(k) Ready for Change?”

Plan Sponsor (4/7/09) – “Is the 401(k) Ready for Change?”

CFO Magazine (4/1/09) - “401(k)risis: The stock-market meltdown has dealt a crushing blow to retirement plans. Brace for repercussions.”

401(k)risis

The stock-market meltdown has dealt a crushing blow to retirement plans. Brace for repercussions.
Lynn Brenner, CFO Magazine
April 1, 2009

See this year's 401(k) Special Report.

Soon after Section 401(k) of the Internal Revenue Code took effect in 1980, it morphed from an obscure investment option into the goose that laid the golden nest egg.

Has that goose been cooked?

The value of the equities held in defined-contribution plans has declined by $2.8 trillion since the market peaked in 2007. The Hewitt 401(k) Index finds employees moving substantial sums into fixed-income investments. And multiple surveys have found that a majority of employees, from the C-suite to the front lines, are now delaying or reconsidering their retirement plans as a result of the sharp decrease in their personal wealth.

This has already had some short-term effects, notably employees fleeing to safer investments or abandoning 401(k) plans altogether. What it will take to restore their comfort level in equities, and what impact their understandable skittishness will have on their overall retirement strategies, remains to be seen.

But far more profound may be the impacts still to come: lawsuits, new regulations, and the specter of an aging workforce that, like a bad party guest, shows no inclination to leave.

It wasn't supposed to be this way. Almost from the start, 401(k) plans enjoyed a huge marketing push from companies and investment firms, and an enthusiastic embrace by workers. Positioned initially as the proverbial "third leg" of the retirement-income stool (along with pensions and Social Security), 401(k)s quickly became the dominant leg (see "A Wobbly Stool" at the end of this article), and companies worked hard to encourage participants to invest for growth rather than safety.

They may rue the day. Many experts in the field say it's nearly certain that the massive investment losses will fuel ERISA-related class-action lawsuits against employers. "If an allegation of a breach of fiduciary duty can be made, it will be made," warns class-action defense attorney Gerald L. Maatman Jr., a partner in Seyfarth, Shaw, a national management-side law firm. Across the board, anxious sponsors are reviewing and retooling their 401(k) programs to minimize their exposure to litigation, even as they try to encourage employees to keep saving.

Fear and Anger
Companies find themselves in a very difficult position. At Call4Health, a medical answering-service company with 60 employees, CFO Nicholas Koutrakos says the company fought a valiant but losing effort to save its plan. "We maintained our match, and we did everything we could to encourage people to stay in the plan," he says. "But our employees are scared. The last thing they want is to put more money into a market that's already down so much." As the economy unraveled, participation dropped from 70 percent to just 30 percent, contribution levels fell drastically, and the plan became too cost-heavy to support. Call4Health terminated the 401(k) plan and now accommodates employees who want to save for retirement by providing direct deposit into individual retirement accounts (IRAs).

"People are afraid," says Karen Martin, who administers Southern Communications Corp.'s SIMPLE Plan. "They aren't looking for a return on their money now; they just don't want to lose any more. Selling seems to make no sense, but neither does riding it out."

Of course, even as companies struggle to address employees' fears and anger, and to maintain a baseline interest in what remains a critical component of a retirement strategy, many are also further dimming the appeal of the plans by reducing or eliminating the company-match component. Kodak, Sears, FedEx, UPS, and many other large companies (12 percent, according to a February survey by Watson Wyatt) have taken that step, and another 12 percent expect to do so in the next year.

Properly managing a 401(k) plan these days entails far more than threading the needle between cost-reduction and participant encouragement, however. First and foremost, companies should take steps to reduce legal exposure. They should also keep a close eye on proposed changes to how the plans operate. And they will, at some point, need to think about the potential impact that all those cracked nest eggs may have on the demographic composition of their workforce.

The 10 biggest settlements for ERISA-related class actions in the United States topped $17.7 billion last year, a 10-fold increase over the $1.8 billion paid out in 2007. Four of the biggest settlements involved allegations of breach of fiduciary duty, says attorney Maatman. He advises CFOs to brace for more such lawsuits this year. Robert Walter, a principal at Buck Consultants, concurs. "As the economy deteriorates, the likelihood of claims by participants goes up," Walter warns. "This is not the time to forget the niceties of 401(k)-plan governance."

Dismal investment returns alone don't expose a sponsor to liability. ERISA doesn't set a market-performance standard, and indeed, none of those large settlements last year were directly linked to the plunging Dow. But lawyers may well see new opportunities, and as fiduciaries plan sponsors must offer a range of suitable, reasonably priced investments and disclose their relative risks and costs — or suffer the legal consequences. And that fiduciary liability rests squarely with plan sponsors, no matter who administers the program, warns Robyn Credico, a defined-contribution practice leader for Watson Wyatt.

Therefore, many companies are quickly brushing up on 401(k)-plan governance. Two-thirds of midsize-to-large employers say they now intend to benchmark 401(k) administration and procedures to best practices, Hewitt says, up from 56 percent last year. (For a list of key governance tips, see the next section.)

Even as they address governance, many plan sponsors will need to keep an eye on a raft of proposed changes. Last year just weeks after the September market plunge, the House Education and Labor Committee held hearings to explore possible modifications. There were several varieties of "universal" accounts proposed, which would cover all workers. Under one plan the federal government would make contributions to such accounts and guarantee a baseline rate of return. A different plan is based around an index fund of both stocks and bonds that would shift toward a more conservative mix as a worker neared retirement.

Indeed, the chorus is growing louder by the day as new groups are formed with the intent of either overhauling the 401(k) system or making substantive enough changes that an outright overhaul is forestalled. Retirement USA, a project backed by the Service Employees International Union, the Economic Policy Institute, the National Committee to Preserve Social Security and Medicare, and the Pension Rights Center, is advocating for "a new visionary system" that would combine elements of a pension plan (such as pooled professional investment and lifetime payout) with portability and simplicity.

"I don't see how 401(k)s can improve enough to be the only retirement vehicle besides Social Security," says Alicia H. Munnell, director of the Boston College Center for Retirement Research. She favors a new tier of retirement saving that is mandatory, that supplements Social Security, and that is protected against market fluctuations — perhaps with a collar from the government guaranteeing a lifetime average rate of return between 4 and 6 percent (assuming the government can bear more risk than the private sector). Such a new tier might transform current 401(k)s into an ancillary benefit for higher-paid employees.

Others, such as former Treasury Department official Mark Iwry, of the Retirement Security Project, say that changing the ways in which participants can take money out of 401(k) plans is just as important as how the money goes in. He and others have proposed a system in which retirees could "test drive" an annuity as a way to become comfortable with an option that only a small percentage takes advantage of today.

Most likely to be adopted sooner rather than later is an "automatic IRA" designed for small companies, which often have no 401(k) plan at all due to the administrative expense. Under this scheme, employees could have IRA deposits automatically deducted from their pay, and companies would receive a small tax credit for setting up such programs.

Another proposal, called SuperSimple, is modeled after a system that will go into effect in the United Kingdom in 2012. It eliminates much of the legal baggage that accompanies corporate-run 401(k)s, such as compliance tests that measure the breadth of participation across a workforce, and adds a government contribution to accounts. It would give employees the chance to opt out, but would feature automatic enrollment and perhaps an automatic escalation of their contribution (as a percentage of pay) over several years.

There are other ideas on the table as well, and it is unclear at this point which ones, aside from those aimed at helping small companies offer some kind of modest defined-contribution plan, will gain real traction in the months ahead. Companies would no doubt love to be disentangled from 401(k) plans, but the prospect of a government-run system faces plenty of political roadblocks and lobbying resistance. "The best thing the government can do for retirement security is to revive the economy and lower the cost of health care," says Walter.

Those steps could help avert a potentially painful side-effect of the current situation: workers who stay on the job longer than they (or their companies) want, due to underfunded retirement accounts. "We're going to see a lot of demoralized people doing the minimum and staying as long as they can," predicts Steven Vernon, president of Rest-of-Life Communications, a retirement-planning advisory firm. Companies, he says, "should have a good performance-management system so you can move them out without getting sued for age discrimination."

Governance Guidance
Companies shouldn't wait to see which, if any, laws will be changed, let alone what demographic bubbles may inflate. But they should shore up defenses now, through improved governance practices, because that can forestall legal actions and ensure that current 401(k) plans are being run as optimally as possible. The keys to good plan governance are:

1. Analyze all plan investments thoroughly. Fiduciary duty compels employers to examine underlying investments and identify the risks, even in funds broadly tailored to risk or age categories. "You don't want to give the impression, even inadvertently, that employees should invest in a fund based on their age or retirement date without considering [all of] their risk preferences," says Walter.

2. Actively monitor performance. Adhere to written guidelines and stay alert, Credico warns. Vendors should not benchmark their own funds, a common trap. Likewise, follow courses of action that guidelines indicate. Astute plan sponsors should notice how benchmarks sometimes shift when investments aren't performing well over an extended period of time, says Credico. "But sometimes, they don't do anything about it."

Investment menus should reflect a full risk/return spectrum. Imbued with a bull-market outlook, 401(k)s offer comparatively few conservative options. Last year, a money fund or a stable-value bond fund supplied the only refuge from a plummeting stock market, says George Naset, retirement-plan services practice leader at 401(k)-plan administrator TRI-AD. "Sponsors discovered that employees who wanted to switch to a more conservative mix didn't like being constrained to a single choice," he says.

3. Disclose fees. This is big. Although plans customarily post fees associated with investment choices, they often don't disclose — or always know about — common revenue-sharing arrangements between plan providers. In these arrangements, investment managers share their revenue with plan administrators and other service providers. The arrangements have spawned litigation against more than a dozen plan sponsors. To date, such charges have not prevailed, but few observers expect the controversy to fade away. "Wall Street firms collect more than $40.5 billion annually in 401(k) fees, yet brokers and human resources often tell workers the fees on their accounts are zero," Teresa Ghilarducci, an economics professor at The New School for Social Research, told a congressional committee late last year.

4. Be wary of company stock. ERISA litigation knows no fury like workers burned by company stock. "If a company plans on investing 401(k)-plan assets in its own stock, it had better be aboveboard with full disclosure," says Maatman. Be scrupulous to a fault. If plaintiffs can connect a falling price to fraud, massive settlements loom. The Big Daddy in this unfortunate category is General Motors. It paid $37.5 million to settle claims that it breached fiduciary duties by not disclosing its true financial condition to employees who invested in GM stock. Also, long before its current problems surfaced, AIG settled a similar case for $24 million, as did Dynegy for $18 million.

5. Talk to employees. Suspending a match program is hard for employees to swallow, but it can be pitched as unavoidable in the current economy. A bigger challenge lies in persuading them to continue saving for retirement. The best inducement, say experts, is an automatic plan — even though it may up the cost of employer matching funds. "Ninety-four percent of the people who are auto-enrolled in a 401(k) plan are still participants one year later," says Cynthia Egan, president of retirement-plan services at T. Rowe Price. Egan says employees who had been automatically enrolled were also less likely than other plan participants to try to make changes in their accounts last September. "In other words, they were less inclined to make investment mistakes."

These days it's much less clear what exactly constitutes a mistake, of course, as short-term considerations threaten to crowd out long-term goals. In the short term, companies may be tempted to put 401(k) considerations on the back burner. But with so much at stake, and so many potential changes in the offing, that would clearly be a mistake.

“Turmoil Spurs Target-Date Evolution”

Employee Benefit Adviser (4/09) - “Turmoil Spurs Target-Date Evolution”

Many U.S. Employers Cut 401(k) Matches Jilian Mincer. Wall Street Journal (Eastern edition). New York, N.Y.: Mar 26, 2009. p. D.2

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“EBRI Examines Factors Determining Impact of Market Losses on Individual 401(k) Balances”

Pension Plan Guide (3/16/09) – “EBRI Examines Factors Determining Impact of Market Losses on Individual 401(k) Balances”

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